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Income Tax Appellate Tribunal, “F”, BENCH MUMBAI
Before: SHRI JASON P. BOAZ, AM & SHRI SANDEEP GOSAIN, JM
PER SANDEEP GOSAIN,JUDICIAL MEMBER:
The present appeal has been filed by the Revenue against the order of the learned CIT (A)-29, Mumbai dated 20-08-2014 passed in appeal No. CIT(A)-29/Rg.18/1/88/11-12 for assessment year 2009-10 whereby the learned CIT (A) has allowed the appeal filed by the assessee on the ground mentioned herein below:- I. “On the facts and in the circumstances of the case and in law, the Ld. CIT(A) has erred in : 1. On the facts and circumstances of the case and in law, the ld. CIT(A) has erred in allowing the interest of Rs. 38,36,600/- as deductible expense in A.Y.2009-10.
On the facts and circumstances of the case and in law, the ld. CIT(A) has erred in holding that interest of Rs. 38,36,000/- has
3. On the facts and circumstances of the case and in law, the ld. CIT(A) has erred in holding that finance cost of Rs.19,82,930/- was deductible expense in A. Y.2009-10.
4. On the facts and circumstances of the case and in law, the ld. CIT(A) has erred in holding that the onus was on A.O. and not on assessee to prove that interest free advance was from borrowed funds.
5. On the facts and circumstances of the case and in law, the ld. CIT(A) has erred in deleting the disallowance of interest even though no business is carried on by the assessee and the only income earned by the assessee from rent and capital gain does not qualify under the head Income from Business .
On the facts and circumstances of the case and in law, the ld. CIT(A) has erred in deleting the disallowance of interest pertaining to business which has ceased to exist and therefore not eligible for deduction of interest expense.
7. On the facts and circumstances of the case and in law, the ld. CIT(A) has erred in deleting the disallowance of interest by relying upon the decision of the Hon'ble Apex Court in the case of Veecumsees v/s CIT (1996) 86 Taxman 243 (SC) which is distinguishable from the case of the assessee.
8. On the facts and circumstances of the case and in law, the ld. CIT(A) has erred in deleting the disallowance even though the question of the same business being carried on was not the issue under appeal because the facts of the case of the assessee are relatable to allowance of expenses after closure of the business.
II. For this and other reasons it is submitted that the order of the CIT(A) may be set aside and that of the AO restored.
III The appellant craves leave to amend or alter any ground or arid a new ground which may be necessary.”
The brief facts of the case are that the assessee was running textile processing unit and the return of income disclosing total income at Rs.55,96,880/- was filed on 30th July, 2009. Subsequently the case was selected for scrutiny. After serving statutory notices and seeking reply of the assessee, the order of assessment u/s 143(3) of the Income Tax Act, 1961 was passed by DCIT(A) on 05/12/2011. While passing the order of assessment, DCIT disallowed the interest and other expenses.
Aggrieved by the order of the assessment, the assessee preferred appeal before the leaned CIT (A) and the learned CIT (A) after considering the case has allowed the appeal and deleted the additions of the assessee vide its order dated 20-08-2014.
Aggrieved by the order of the learned CIT (A), the Revenue is now in appeal before us on the aforementioned grounds.
Ground No.I (1,2&6)
Since all the grounds raised by the assessee are inter-connected and inter-related therefore we thought it fit to dispose off the same through the present common order. This ground raised by the revenue relates to the issue of allowing the interest of Rs.38,36,600/- as deductible expenses in A.Y. 2009-10. In this respect, ld. DR appearing on behalf of revenue supported the orders passed by AO and submitted that although the assessee has paid interest to its lenders and that is why it has made TDS from such payments, however the assessee was not entitled for the allowances of the said amount as the assessee is maintaining its books of pertaining to earlier years was required to be debited in the year in which it was liable to be paid or accrued. It was further argued by ld. DR that merely because the assessee has mutually agreed with the lenders that the provision of interest would be made in the account in the year, the firm (borrower) would be able to make the payment does not automatically give the liberty to follow such agreement. It was argued by ld. DR that section 145 contemplates only two accounting system either cash or mercantile system and it does not allow any other system. So, if the assessee is following the mercantile system then the liability does not get postponed merely because quantification is done after the year, but accrued in the previous year. Ld. DR relied upon the judgement of Hon’ble Supreme Court in the case of Kedarnath Jute Manufacturing Co.
Ltd. vs. CIT 82 ITR 363 (SC). It was further argued by ld. DR that proviso to section 40(a)(ia) deals with the situation where in respect of any such sum, i.e. in the present context being ‘interest’ paid or payable on which tax deductible but not deducted will be allowed deduction in the year TDS is deducted. As per the arguments of ld. DR no interest was paid or payable and no provision was at all made in the years 1999-2000, 2004- 05, therefore no deduction of interest paid could have been allowed by CIT(A). On the other hand, ld. AR has relied upon the orders passed by CIT(A) and had submitted that the AO has not considered the factual legal position as made by the assessee. At the time of assessment it was argued by ld. AR that although the AO had expected that interest were paid and TDS was deducted and paid such interest in the instant case since the assessee is maintaining the books of accounts on mercantile basis and passed entries in the books of accounts on accrual basis.
Therefore, no provision for interest was made by the assessee in the accounts as the liability was not actually incurred or due at all as per the terms of borrowing. It was further argued by ld. AR that in the present case section 40A (ia) of the Income Tax Act,1961 is not attracted as the liabilities were not accrued and borrowing was made for business purpose. It was further submitted that the AO has not accepted the facts that loan was interest free and repaid in the year 2004-05, however compensation by way of interest was paid much latter in AY 2009-10. It was also pointed out that the lender company also offered the said income for taxation in the AY 2009-10 on the basis of TDS certificates issued by firm. In this respect ld. AR also drawn our attention to the paper book which contains certificates, P& L A/c, TDS certificates etc.
We have heard the counsels for both the parties on this ground and we have also perused the material placed on record as well as the orders passed by the revenue authorities. Ld. CIT(A) has dealt with the said issues in its order and the same is reproduced below:
“11. I have perused the facts & circumstances of the case as well as the above submissions of the appellant carefully. 12. It is undisputed fact that the impugned loans were taken at the time when the business of assessee company was running in losses. It can further be observed that the business purpose of interest cost incurred is not disputed rather the dispute is with regard to the year in which the interest expenses should be allowed. The appellant has contended that the interest was not provided for in its books earlier due to the arrangement between the parties to pay the principle amount first and then the interest would be accounted for when the appellant is able to pay the same. Such an arrangement has been made looking at the financial condition of the business and appears to be valid arrangement. Later on the appellant's textile business was dosed down due to adverse business conditions, and also a part of the loan was recovered by lenders by selling the pledged shares. It is understandable that in such a case, where the borrower's financial condition was not sound, the lenders might wish to postpone the recognition of interest income which may or may not be realized at all in future. Conversely in such a case, the appellant (borrower) may also not be expected to claim or provide for the interest expenses on accrual basis unilaterally as the certainty of the payment of the same is not definite. In fact, the said interest liability has been crystallized during the year, as earlier it was not certain whether the interest would be payable or not. The appellant has paid the interest after deducting TDS in current assessment year, and accordingly claimed the interest expenses in current assessment year. Since the appellant was in a position to pay the interest component, the same was provided and paid during the year under consideration. As such it is an allowable expenditure.
In view of the facts and circumstances explained above, I find that there is no justification in disallowing such claim of the appellant for the payment of interest.
The AO has also contended that the claim of interest expenses should be debited to the years in which it was liable to be paid or accrued. Even if said contention of AO is accepted, the respective amounts cannot be claimed allowed in those years in view of the provisions of Sec. 40(a)(ia), since no TDS was deducted against the same in those years. Further, since the appellant has deducted the TDS in A.Y. 2009-10 under consideration, it would be automatically be allowed in this year, as per Proviso to Sec. 40(a)(ia), 15. The AO has argued that under mercantile system of accounting, the liability does not get postponed merely because quantification is done later, relying upon the judgment in the case of Kedarnath Jute Manufacturing Co. Ltd. (supra). I find the said case is distinguishable on facts. It was held in said judgment that the assessee maintaining accounts on mercantile system was fully justified in claiming deduction of sales tax which it was liable to pay during the relevant assessment year, and the liability remained intact even after the assessee had taken appeals to higher authorities or courts which failed. In the present case, the liability of appellant was not accrued in earlier years due to the mutual arrangement of appellant with the lenders and the appellant is not contesting at all the claim of liability on accrual basis in those years, In contrast to the case of Kedarnath Jute Manufacturing Co ltd. (supra).
It is a fact on record that the appellant has provided for & paid the interest expenses in current assessment year, and also deducted the applicable TDS thereon, and further, the counter parties have also recognized their corresponding income in current assessment year. In these circumstances, it would not be justified to disallow the interest (A.Y.2009-10) ACIT vs. M/s. V.S. Apte & Son expenses in hands of the appellant for various reasons stated hereinabove. 17. In view of the facts and circumstances explained above, I delete the disallowance of interest payment of Rs. 38,36,600/-. Therefore, the ground no. 1 of appeal is accordingly allowed.”
6. After hearing the arguments and after perusal of documents as well as the orders passed by CIT(A), we are of the considered view that the CIT(A) judicially taken into consideration that as per the facts and circumstances of the present case where the borrowers financial condition was not sound, the lenders might wish to postpone the recognition of interest income which may or may not be realized at all in future. Ld. CIT(A) has also appreciated that in the facts of the present case the said interest liability has been crystallized during the year, as earlier it was not certain whether the interest would be payable or not. Since the assessee has paid the interest after deducting TDS in current assessment year, and accordingly claimed the interest expenses in current assessment year as the assessee was in a position to pay the interest component and hence the same was provided and paid during the year under consideration. Ld. CIT(A) has rightly found no justification in disallowing such claim of the assessee for the payment of interest. It was also appreciated by ld. CIT(A) that since the assessee has deducted the TDS in AY 2009-10 under consideration therefore it would automatically be allowed in this year as
per the provision of section 40(a)(ia). Ld. CIT(A) has also found the facts of the present case distinguishable from the facts of the case of Kedarnath Jute Manufacturing co. Ltd. (supra) as per the facts of the mercantile system was fully justified in claiming deduction of sales tax which it was liable to pay during the relevant assessment year, and the liability remained intact even after the assessee had taken appeals to higher authorities or courts which failed. However while distinguishing the facts from the present case it was found by ld. CIT(A) that as per the facts of the present case, the liability of assessee was not accrued in earlier years due to the mutual arrangement of assessee with the lenders, and the assessee is not contesting at all the claim of liability on accrual basis in those years in contrast to the case of Kedarnath Jute Manufacturing co.
Ltd. (supra).
No new circumstance has been brought on record before us by the learned DR in order to controvert or rebut the findings recorded by the learned CIT (A) on the basis of the remand report. Moreover, there is no reason for us to deviate from the findings recorded by the learned CIT (A).
Therefore, we are of the considered view that the findings recoded by the learned CIT (A) are judicious and are well reasoned. Accordingly, we uphold the same. Resultantly, this ground raised by the Revenue stands dismissed.
Ground No.3,4,5,7,8
Since all the grounds raised
by the assessee are inter-connected and inter-related therefore we thought it fit to dispose off the same regarding finance against Rs.19,82,930/- in AY 2009-10. In this respect ld. DR supported the orders passed by AO and submit that the finance parties pertaining the interest paid of Rs.16,78,368/-, Brokerage of Rs.2,97,829/- and Bank charges of Rs.6,733/- total amounting to Rs.19,82,930/- had been loaded by the assessee on loans which were taken to finance the losses of the textile processing the process which was closed down much earlier to the previous year relevant to assessment year being considered for assessment. It was argued by ld. DR that since the assessee has discontinued its core business of textile processing for which the loans were taken therefore the interest paid and other incidental charges for availing that loans could not be allowed as deduction. Ld. DR without prejudice to the above arguments further submitted that the interest cannot be allowed in view of the assessee advancing interest free loans to various parties amounting to nearly Rs.2.82 crores, and in order to support his arguments ld. DR relied upon CIT vs. Avery Cycle Industries India Ltd. (2008) 209 CTR 167 (P&H) and CIT vs. Abhisek Industries Ltd. (2006) 286 ITR
1. (P&H).
On the other hand ld. AR representing the assessee relied upon the orders passed by CIT(A) and submitted that interest free loan given to the sister concern were partly allowed out of profit generated from the firm. It was argued by ld. AR that the AO has failed to take into consideration the fact that the family members of promoters has given interest free loan to Rs.138.53 lakhs. Therefore, the decision of the AO to the effect that the interest free advance given to the sister concern out of the borrowing money is altogether incorrect.
We have heard the counsels for both the parties on this ground and we have also perused the material placed on record as well as the orders passed by the revenue authorities. Ld. CIT(A) had dealt with the other ground in para no. 24 to 31 of CIT(A) and the same is reproduced below for the sake of reference.
“24. I have perused the facts of present case as well as the above written submissions of the appellant carefully. I find two issues involved in adjudicating the ground of appeal: (i) Whether the interest can be disallowed due to closure of business/ closure of one of the activities: (ii) Whether the interest expenses could be attributed to interest free loans given to sister concerns in present case.
25. Coming to the first issue, I find that in the case of L.M. Chhabda and Sons (supra) relied upon by the AD, it was held by Hon'ble Supreme Court that if an assessee carries on several distinct and independent businesses, and one of such business is closed before the previous year, he cannot claim allowance under section 10 of the 1922 Act of an outgoing attributable to the business which is closed against the income of his other businesses in that year. I, however, find that in another case of Veecumsees vs. CIT (1996) 86 Taxman 243 (SC), the specific issue of allow ability of interest on borrowed capital u/s 36(1)(iii) on discontinued business was examined. The Hon'ble Supreme Court held that "The fact that the particular part of the business for which the loans had been obtained had been transferred or closed down did not alter the fact that the loans had, when obtained, been for the purpose of the assessee's business. The test of 'same business' appropriate for set-off of carried forward losses was not appropriate here".
26. In the present case, it can be observed that the loan was initially taken for textile business, which has been closed I suspended due to adverse business conditions. The appellant is still showing income from certain other sources such as rental income, & profit on sale of shares, though not under the head "Profits or gains of business or profession". In view of the later judgment of Hon'ble Supreme Court in the case of Veecumsees (supra), I am of the opinion that carrying on the same business for which the loan was initially taken is not necessary for claim of deduction of interest u/s 36(1 )(iii). The business of the appellant is a composite business during the period under consideration and expenditure is incurred for this composite business activities. Hence, the claim of appellant of interest cannot be denied.
27. Now coming to the second issue, the appellant has shown by giving figures that it has advanced interest free loans out of interest free loans from family & partner's capital. The position of the borrowed funds and the interest free funds given to the sister concerns are as under:- Balance Less: Balance Loans Increase/ Description as on interest interest amount Decrease 1/4/2000 free bearing outstanding loans loans as as on included in at 31/3/2009 loan 1/4/2000 schedule as of 1-4- 2000 1 Loans- 139.89 0 139.89 Nil Paid in Interest paid Secured 2004- 05 for earlier Yr 2 Loans 163.28 91.52 71.46 98.40 (+)26.64 unsecured 3 Loans & 237.11 0 237.11 282.58 (+) 45.47 Advances paid to sister concern 4 Interest 91.52 91.52 238.80 (+)147.28 free loans from family 5 Partners 171.54 171.54 110.28 (+)138.53 Capital a/c debit debit (-)77.27 =33.01
From the above table, the following facts emerge:-
“2) Unsecured loans shown at Sr.No.2 above (balance Sheet Schedule A), amounting to RS.163.28 lakhs includes interest free loans of RS.91.53 received from partner family as such net interest bearing unsecured loan was Rs. 71. 76 lacs as at 31/03/2000 and RS.98.40 lakhs as at 3110312009 which means loans were just increased by Rs 26.64lakhs.
3) Loans and advances paid to sister concerns as at 01-04-2000 were Rs.237.11 lakhs and as at 31/03/2009 were Rs.282.58 lacs which means advances increased by Rs.45.47 lakhs.
4) Interest free loan from family members were Rs.91.52 lakhs as at 01/04/2000 and RS.238.80 as at 31/03/2009 which is substantially increased by RS.147.28 lacs.
5) Partners' capital account as at 0110412000 was 171.54 lacs (debit balance) and as at 3110312009 was RS.33.01 lacs which indicates that either firm has made profit or partners have bought money in the business."
It can be observed from the above that no advances were given out of the borrowed funds. The family members of the appellant firm have brought in interest free funds to the tune of Rs. 147.28 lakhs. The net increase of the interest free funds to the sister concerns during the period under consideration are to the tune of Rs. 45.47 lakhs, which are much less than the interest free funds received from the family members. Therefore, it can be assumed that the interest free funds to the sister concerns during the period under consideration were out of the interest free funds from the family members and it will not have any impact on the interest payment made by the appellant for the other business purposes.
It can be observed from the assessment order that the AO has not examined in detail to establish that the interest free loans to sister concerns were out borrowed funds. In absence of proving any nexus between the borrowed funds and interest free loans given it would not be justified to make any disallowance.
In view of the above, the addition made by making the disallowance amounting to Rs. 19,82,930/-is not justified and hence deleted. Therefore, the ground no. 2 of appeal is allowed.”
We have considered the both factual and legal issues which are involved in adjudicating this ground of appeal (i) whether the interest can be disallowed due to the closure of business/profession closure of one of the activities. (ii) whether the interest expenses can be attributed to interest free loans given to sister concerns in present case. Both issues with the first issue has rightly considered the facts of the present case and observed that the loan was initially taken for textile business, which has been closed/suspended due to adverse business conditions but the assessee is still showing income from certain other sources such as rental income and profit on sale of shares though not under the head “ Profits or gains of business or profession”. Ld. CIT(A) while considering the latter judgement of Hon’ble Supreme court in the case of Veecumsees (supra) had rightly come to the conclusion that business of the assessee is a composite business during the period under consideration and expenditure is incurred for this composite business activities. Hence, the ld. CIT(A) has rightly held that the claim of the assessee of interest cannot be denied. The ld. CIT(A) has also considered the figures regarding advance of interest free loans out of interest free loans from family and partner’s capital and the ld. CIT(A) after considering the facts and figures and documentary evidences has correctly noticed that the interest free funds to the sister concerns during the period under consideration were out of interest free funds from the family members and it will not have any impact on the interest payment made by the assessee for the other business purposes. We have also found that as per assessment order the AO had not examined in detail to establish that the interest free loans to sister concerns were out of borrowed funds and therefore in the absence of proving any nexus between the borrowed funds and interest free loans given by the assessee, it was not justifiable for the AO to make any disallowance.
12. After analyzing the afore mentioned orders of CIT(A) we found that the CIT(A) has dealt with the issues and has passed judicious and well reasoned order and no circumstances have been brought before us in order to controvert or rebut the findings recorded by the CIT(A).
Therefore, we see no reason to deviate or interfere into the findings recorded by the CIT(A) and hence, we reject these grounds of appeal raised by the revenue and uphold the order of the CIT(A).
13. Ground No. II & III of the revenue’s appeal are general in nature and, therefore, needs no separate adjudication.